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Water infrastructure: time to open the investment tap

Meeting the world's need for fresh water is even more challenging as water supply infrastructures are ageing and require investment.

Water
accounts for 71% of Earth's surface. In its many forms, from oceans to rivers,
it is the core element humanity is based upon.

Human
society has developed around fresh water sources, allowing for population
growth, the birth of agrarian societies, domestication of animals, and later,
manufacturing and industry.

But
today this central element of life and of society appears less of a plentiful
commodity and, increasingly, as a rare and precious resource that needs to be
protected and preserved. 3.9 billion people are expected to live in severely
water-depressed areas by 2050. That's more than 40% of the world's population
(source: UNU-INWEH, 2017).

Rapid
population growth and economic expansion is putting heightened pressure on
demand, while climate change is furthering pressure on the supply chain –
represented by nature's water cycle. With an ecosystem where water supply
infrastructures are ageing and require investment, meeting the world's need for
fresh water is more and more challenging. The UN expects that in order to
achieve the ambitions of its Sustainable Development Goals, the capital
investment in the water sector will need to reach at least $114bn per year. A
crisis is looming and can only be addressed with a strong will and a clear
action plan from the international community.

Sustainable Development Goal 6: Ensure availability and sustainable management of water and sanitation for all [Source: United Nations]

Provisioning Fresh Water: The Challenging Ambition to Sustain the Water Cycle

While
to the first astronauts the earth looked like a blue planet, the 70% of the
globe covered in water does not provide for the water required for human life
to prosper. Only 3% of the world's water supply is fit for human and industrial
consumption and only a fraction of this 3% is easily accessible. These reserves
of fresh water are being constantly depleted and replenished through a
mechanism involving complex sets of interactions within the natural ecosystem.

Water Cycle

[Source: CIMSS]

While
water is prevalent, a significant portion of the population today lives in
water-depressed areas, with more than one third of the global population living
under water scarcity at least one month per year and more than 500 million
people living in severe water scarcity all year long. (Source: UNU-INWEH, 2017)

In
addition to the scarcity of fresh water itself, it needs to be stored, treated
and delivered to urban centres for consumption, thereby requiring heavy
infrastructure able to handle these services. In most places, even when the
supply is at a reasonable level, the infrastructure is lagging and do not
deliver for citizens.

While
the pressure arising from population and economic growth is poised to continue
to increase consumption, global warming and pollution are aggravating the
stress on the supply of fresh water. At the same time, existing equipment is
already struggling to cope with the increase in population, and heavy
investment is required just to keep the infrastructure up-to-date and running.

Status of water scarcity [Source: UNU-INWEH, 2017]

Water management and water production need investment

In
early 2018, Cape Town announced plans for "Day Zero", the moment at
which the water level in dams would be so low that they would have to just shut
down the supply of urban water. This announcement caused panic, fear of unrest,
and reduced tourism bookings, among other factors – but also helped to both
relaunch the debate about water usage and made salient the value of water. As a
result, "Day Zero" was narrowly avoided and the average use of water was
reduced to much more reasonable levels.

Facing
a similar problem – compounded by the reduced rain brought by climate change –
sunburnt cities in Australia have been heavily investing in education campaigns
focusing on water usage and water infrastructure to secure the diversity of
their water supply. Similarly, Singapore moved in a similar direction by mixing
recycled water (obtained from recycling previously used water) into its
drinking supply.

These
examples, as well as public scandals like the Flint water crisis in Michigan in
the US, or the recent wave of news covering the shocking levels of plastic in
the world's oceans, have started to accelerate the general public's
mobilisation against pollution and has raised awareness about the need to stop
taking clean water for granted.

The
conversation over the growing value of water is now becoming surprisingly
upbeat. The largest industrial consumers of water – textile, food and beverage,
oil and gas, mining, agriculture, chemicals and power – as well as the
municipal ones (mainly utilities) are actively engaging in this public debate.
For example, since the 'Millennium Drought', Australia's water companies have
worked to reinvent the meaning of utility services, engaging with customers and
pushing through dramatic tariff rises and managing demand increases. Today,
customers are following businesses. Moreover, consumer concerns are pushing
businesses to comply with global standards (for example, in the textile industry,
these standards are set by programmes like the Zero Discharge of Harmful
Chemicals and the Clean Cotton Initiative).

In
that context, the utilities sector is at the forefront of the debate and the
discussion. These companies – often in partnership with local governments – are
responsible for ensuring that clean, safe water is available to meet the needs
of current customers and of future generations. They are confronting formidable
challenges as they maintain, repair, and expand the water infrastructure system
that supplies clean water to their customers, collects and treats wastewater,
and manages storm water.

To
meet the water challenge, multiple stakeholders at all levels must be engaged,
from users to employees, from management to local governments and from
financiers to investors. Achieving sustainable water operations will require
significant cultural change, but also some heavy investment in new solutions
such as leakage management, storm water overflow, desalinisation plants, smart
cities, wastewater treatment, water reuse, etc.

"...more than three times the current level of capital investment is needed to achieve the Sustainable Development Goal six targets on water supply, sanitation and hygiene (6.1 and 6.2). The amount of money needed to meet the other targets of the "water goal" is currently unknown"

Source:
UNU-INWEH, 2017

Achieving this scale
of investment will require more than expertise and creativity; it will require
commitments from governments, banks and investors, and from the end users.

Clean
water utilities have begun to take the lead with new technologies and new
practices that focus on resource recovery, efficiency and sustainability. The
"Utility of the Future" and smart water, for example, are attempts to
understand and envision how digital technology – such as connected devices and
intelligent systems – will bring about a radical transformation of the utility
value chain and of the water sector generally, with organisations such as the
Water Environment Foundation among the leading advocates. A major objective is
to change how users think about the way they use water: making salient some of
the key parameters – such as the cost of water, resiliency, water quality and
the water-energy nexus (the relationship between water used and energy
consumed) – will be needed for change to happen.

Financing the Future – addressing the challenge of tomorrow

Global
awareness is rising, with growing interest in the 'green economy' and a slow
drift of investors' capital allocation toward "green" investments. In that
context, capital providers in general, and banks in particular, leverage their
position as intermediary between capital owners and projects in need of
financing, to help channel this investment into projects focused on addressing
the water challenge.

The cycle of water sector financing [Source: WBG, November 2016]

Another
promising field, but one which again is in need of capital, is "green"
infrastructure, which focuses on promoting the use of innovations such as permeable
pavements, bio-retention swales, and rain barrels. While this need initial
capital, they offer local governments and utility companies potential
cost-saving alternatives to traditional storm water infrastructure.

A
new class of financing products, such as sustainable bonds – financing
instruments focusing on green and social projects – are helping utility
companies finance the projects outlined above, while also meeting investors'
demands for financial products aligned to their own sustainability goals.

Most
banks has adhered to a set of principles – the "Green Bonds Principles" –
codifying projects that are qualifying for being financed by Green Bonds.
Amongst these principles, several categories are directly related to water,
including "Sustainable Water and Wastewater Management" and "Terrestrial and
Aquatic Biodiversity Conservation", thereby giving a structure and taxonomy for
water-related project that can benefit from this new class of financial
instruments.

This
class of financial instrument leverages the increasingly pervasive presence of
"green" focused investment funds looking to invest in specific projects and
corporates abiding by sustainable rules and ambitions to help the world achieve
the Sustainable Development Goals (SDGs).

Financing sources available to support water projects

Water
companies looking to raise capital for sustainable projects can look to green
financing instruments if they wish to raise and direct capital specifically for
sustainable projects. Moreover, the deployment of digital technologies is
starting to transform the hitherto traditional structure of utilities through
the provision of advanced data and analytics.

Paving the way for investment

Global
institutions and international organisations are also clearing the path for
investors, putting in place programmes to encourage and enable investment in
sustainable projects. The World Bank, for example, has developed a supporting
framework to assist the entire financial landscape to play its role. The ultimate
goal of this programme is to facilitate access to drinking water (10% of the
world population have no access to drinking water, as of today) while laying
the ground for the investments required to reduce the currently contemplated
supply gap by 2030 for drinkable water (source: 2030 Water Resource Group).

A proposed financing path to break out of the unsustainable status quo to meet the water SDG. [Source: WBG, 2016]

World Bank's recommendations to improve water sector efficiency and financing. [Source: WBG, 2016]

In
parallel, the OECD has launched its own initiative to promote the financing of
water investments, while the Environmental Protection Agency in the US has
launched initiatives to finance projects relating to clean water and
sustainable sources.

The
introduction of such important actors into the water market is testament to the
massive undertaking required to address water scarcity. The efforts of taxonomy
and transparency launched by such large intergovernmental actors are likely to
provide a catalyst to accelerate the efforts of private actors, align
incentives and nudge behaviour.

Politically sensitive

Despite the alignment of intergovernmental and private
actors to help populations in water-depressed areas, strong geopolitical issues
can overshadow these efforts and exacerbate the water crisis rather than fight
it.

As much as 60% of water sources come from transnational
water basins (present across borders). Political instability, emerging market
debt crises, rising interest rates and fluctuations in oil prices – can all
aggravate already difficult situations.

Until
the political environment can be aligned to provide enough stability and
perspective, for long term investment, fostering innovation in a market where a
zero-risk mentality has – understandably – been the mantra for decades, can
prove difficult. In order to facilitate the adoption of innovations that could
help address the water crisis, such zero-risk mentality needs to change.

Similarly,
the resolution of the water crisis will depend significantly on a change of
behaviour from the end users – from individuals to industries. As demonstrated
by Cape Town's "Day Zero", a mobilisation of the general public can make a
significant difference, with simple changes in mindset and increased awareness.
Ongoing education will likely help curb consumption and deliver more
sustainable outcomes.

Finally,
when the political situation is stable and secure enough and when end users
curb their consumption, aided by favourable regulation, the required
investments will need to be met through smart allocation of capital. In that
respect, the role of finance actors, enabled by societal and political changes,
is key in bridging the gap between projects and capital providers to ensure
long term investments are met and contribute to the world's needs and the SDGs.

To
achieve these ambitious goals, a general mobilisation of stakeholders across
the board needs to occur, whether governments or citizens, industries or
consumers, or utilities or investors.

Flowing to the future

While
the aftermath of the Second World War was focused on energy security, a
paradigm that lasted well into the 2000s, the 21st century could very well be
defined by water security and access to fresh water. The problem has become
urgent and is of huge scale, both in emerging and developed markets, where the
actual price of water currently does not represent its true cost.

While
political issues will continue to play a key role, one of the most pressing
issues that can be tackled now relates to the need for massive investment in
the coming decades to address the supply of water on a global scale and make
sure expected population growth can be handled while ensuring the economy can
continue to grow without being limited by fresh water supply.

In
that regard, efforts by large institutional actors, investors, individuals and
corporates alike, have started to align to set the stage for a future where at
least some of the challenges of tomorrow are sustainably addressed.

Our latest survey reveals a stronger commitment to integrating ESG in investment decisions since 2017. The next few years will be vital for asset owners and managers to achieve the right mix of investment, technology and skills.